Kraft's split on schedule

September 13, 2011
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by L. Joshua Sosland

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BOSTON — Kraft Foods Inc. plans to launch its two independent public companies by late 2012, and strong financial results and operating momentum across the world have made the company’s plan possible, according to a presentation by Irene Rosenfeld, chairman and chief executive officer of Kraft, at the Barclays Capital Back-to-School Consumer Conference on Sept. 7.

“Over the past four years, we’ve fundamentally changed the face, footprint and prospects of Kraft Foods,” Ms. Rosenfeld said. “We’ve successfully positioned our company to deliver sustainable top-tier growth by reinvigorating our iconic brands, transforming our portfolio and strengthening our presence in fast-growing developing markets. But taking our performance to the next level requires a bold new approach — creating two great companies that can optimize value by focusing on their unique drivers of success.”

In the presentation, Ms. Rosenfeld said many of the changes the Northfield, Ill.-based company has made during the past four years, ranging from the acquisitions of Cadbury and LU Biscuits, to decentralizing decision-making, a focus on what she described as “power brands,” and a focus on innovation and marketing have fundamentally changed the company.

“But as the company changed, our outlook has also changed,” she said. “When we considered the success of the last few years, the current operating environment and what it would take to accelerate our performance in each part of the portfolio, it became clear that a new approach was necessary.

“To better appreciate the distinct opportunities and critical success factors for each, it is instructive to highlight just what those differences are. First, our grocery brands, despite their universal household penetration, are primarily focused in North America with a limited global presence. By contrast, the bulk of the Global Snacks business is made up of global platforms and brand icons such as Oreo, Cadbury and Trident.

“Our North American Grocery products are primarily sold in the center of the store. The executional focus is on managing the shelf. This makes them best suited to go through warehouse distribution with a low variable cost structure and modest selling expense.

“By contrast, our Global Snacks products are highly impulse-driven, found in multiple locations around the store, including the snacking aisle, end caps or the hot zones near the cash register. As such, they benefit greatly from a high touch, more labor-intensive sales and distribution capability, often direct-store delivery. Yes, this does re-quire a higher fixed cost structure with higher selling expenses, but it allows us to manage product mix and to maximize revenues much more effectively.”

After the separation, the North American Grocery business will have annual revenue of about $16 billion and market-leading positions in about 80% of its categories. It will include the Kraft, Maxwell House, Oscar Mayer and Philadelphia “billion-dollar” brands, plus three more brands with revenues of at least $500 million and another 14 brands with revenue of more than $100 million.

“In a sense, the North American Grocery business will be a pure play as a lean, mean center-of-the-store machine in the most profitable markets in the world,” Ms. Rosenfeld said. “Going forward, the North American Grocery business can leverage its category-leading market positions and continue to deploy its capabilities in innovation and marketing while focusing single-mindedly on warehouse distribution and sales efficiency.”

Ms. Rosenfeld emphasized that the North American Grocery business’ scale and efficiencies will be central to the business’ success given how the North American market has changed.

“Simply put … the U.S. has stalled,” she said. “In the 19 largest food and beverage categories, the average growth rate has plunged from about 5% compound annual growth to essentially flat last year.

“We are well outperforming the industry, but our categories too have decelerated from approximately 5% to 2% growth in 2010. If you believe that there is a new normal of slower consumption growth in North America, and we do, then certain capabilities will be even more important in the future. Things like stronger share position, world-class marketing, go-to-market scale, and low-cost producer status will become even more critical in the future.”

The Global Snacks business will have revenues of about $32 billion after the separation. It will have more than 42% of sales from developing markets, 36% from Western Europe and 22% from North America. About 75% of Global Snacks revenue will come from snacks, and it will have eight “billion-dollar” brands — Cadbury, Jacobs, LU, Milka, Nabisco, Oreo, Tang and Trident. It also will have another six brands with revenue of more than $500 million and 40 other brands with more than $100 million in sales.

“Geographically speaking, Global Snacks will rank among the leading C.P.G. players in emerging markets,” she said. “Indeed, this company will have one of the most desirable exposures to developing markets among large-cap C.P.G. players.”

Until the new companies are created, Kraft will continue to report as one company and will work to deliver on its goals for 2011 and 2012, she said.

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